Top 10 small business legal pitfalls

By Oliver Milman
Thursday, 14 July 2011

The rapidly unravelling saga of News Corporation shows that legal woes can severely impact on even large businesses with elite teams of highly-paid lawyers.


It’s unlikely that a sensational controversy such as the News of the World phone hacking scandal will bring your business to its knees.


But simple mistakes such as missing documentation can result in disastrous legal repercussions.


StartupSmart headed to the lawyers to identify the 10 most common legal pitfalls for start-ups to be aware of.


1. Getting in a business name muddle

The government recently launched proposals to create a national system for naming your business but until it comes to fruition you need to register your start-up name in every state you’re operating in.


“You need a business name for your state, a company name to operate interstate and you need to trade mark where necessary – that’s three areas to look after,” says Craig Yeung, partner at law firm Piper Alderman.


“It’s actually an offence to operate nationally if you aren’t registered properly. You need to make sure you do an ASIC search.”


2. Failing to define your partnerships

If you’re starting in a business partnership you need to clearly define your roles and responsibilities from day one.


Who does what? Who gets paid what? How do you share the workload? What do you do if things go wrong? It’s vital that this is put in writing.


“If there is more than one person involved there should be a ‘minimum commitment’ document setting out things such as the minimum cash/in-kind contributions to be made,” advises lawyer James Omond.


3. Not outlining your exit strategy

With every partnership it’s inevitable that one party will eventually leave for a variety of different reasons. To avoid a costly legal battle make sure that you thrash out your respective exit strategies.


“You must have an exit strategy,” Omond says. “Even if you are starting up with your best mate ensure there is something in writing that states when and how someone can get out of the business and what they can and can't take with them.”


4. Not agreeing proper terms with investors

A cashed-up investor wants to back your start-up. You have the skills and he or she has the money. Fantastic. But make sure you don’t get swept up in an unfavourable deal or court action may be your only recourse.


“Spend time preparing a terms sheet and shareholder agreement – know what you’re getting into,” says Yeung.


“I know of one entrepreneur who gave away 50% of the business for just $5000 thinking that the investor would be a wonderful business partner for life.


“The agreement he signed basically allowed the investor to force him out. Sure enough, within six months he lost the whole business. You need a legal document from an investor that you can hang your hat on.”


5. Failing to get the basics documented

It’s not just the large, business-changing decisions that require careful documentation. Everything from supplier conditions to office rental agreements needs to be worded in your favour or at the very least should provide you with some protection.


“I know of a business that signed NDAs but missed out the word ‘not’, as in the investor should not copy the idea, in the documents,” says Yeung.


“That basically authorised them to set up an identical business. I’ve also seen someone trying to offer 15% of his business to a VC and he hadn’t incorporated properly.”


That and many other legal problems can be remedied by simply getting things in writing rather than leaving things to chance.


“If you are relying on someone else to do something make sure you get their commitment in writing,” says Omond.


“If it's only verbal not only is there a danger the commitment is unenforceable, there is too often misunderstanding of the extent of obligations when it's just a handshake.


“Committing it to writing makes everyone think harder and makes you more specific about exactly what is required.”

6. Misunderstanding contractual obligations

Take a look through all the various contracts you’ve signed to help run your business. Do you know exactly what you’ve signed up for?


“Ensure you understand commitments you make, like the disclosures required of mobile phone contracts,” says Omond.


“Make sure you understand the long-term commitments under leases, hire-purchase contracts and so on, especially where you are giving personal guarantees.”


7. Being lax over intellectual property

Don’t feel that registering your business name is enough protection for you in the marketplace. The business world is rife with examples of rivals who will copy and steal IP to undermine each other.


Avoid infringing others and get your own processes, systems and brands properly protected.


“You need to ensure that you are not infringing someone else’s registered trade mark and preferably register your own name too,” says Omond.


8. Getting tied in to someone else’s work

Similarly, you need to make sure that you have the flexibility to make changes to your business and its arrangements without stepping on anyone’s toes.


“If you are paying someone else for a website make sure you will own the IP in the website once it is developed,” says Omond.


“You need to be able to use someone else to manage/update/change it if necessary and not be tied to the developer.


“Likewise for anything else you pay for get written assignment of copyright in labels and images that you commission.”


9. Mixing business with pleasure

If you are running a small-scale start-up it’s tempting to see it as just an extension of your personal life.


That often leads to entrepreneurs mixing the finances of their business up with their own bank accounts.


Make sure that you keep clear delineation between your business and personal lives and you will keep the taxman happy and avoid people holding you personally responsible for company debts.


10. Not understanding your employer obligations

If you are hiring for the first time are you up to speed with pay awards?


Are you aware what the law says around working conditions and administration of schemes like Paid Parental Leave?


Do you have codes of practice in place to deal with instances of harassment, discrimination and bullying behaviour? If not it’s time you started drawing them up now, before you end up with a legal letter on your desk.


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James Omond
With all due respect to Craig Yeung, my cynical view of business name registrations is that they are just a State government fund-raiser. In VIctoria, for example, I believe only one person has ever been prosecuted for failing to register a business name - and that was a fraudster who Consumer Affairs couldn't get anything else to stick to (like the Feds getting Al Capone on tax evasion).

The thinking behind requiring business name registration is so third parties can establish who is the real owner of a business.

If your business name is essentially the same as your company name, you don't need to register the former.

My view is that, if you are going to be doing business Australia-wide under a separate name, you should register it as a trade mark - which is a single registration that lasts for 10 years and gives you proprietary rights, rather than 7 or 8 separate business name registrations whicvh last only 3 years each, and gives you no proprietary interest in the name, nor protection from alleged infringement by other parties.


James Omond
a guest , July 15, 2011
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